Photo by U.S. Dept. of Agriculture
United States / Trade War

US-China Trade War

While exploring the food systems and rural communities of Iowa on an Alternative Spring Break trip, two things surprised me. The first, is that I became a vegetarian. The second, is that Iowa has become a geopolitical battlefield at the center of a recent trade dispute between the US and China.

On March 1, President Trump issued tariffs imposing a twenty-five percent tax on steel and a ten percent tax on aluminum from around the world. After strenuous negotiations and modifications of former trade agreements, Trump exempted South Korea, the European Union, Mexico, Brazil and Canada from the trade barriers. The proposed tax on sixty billion dollars worth of Chinese goods reflects Trump’s aim to decrease America’s trade deficit: in his simple calculation, Trump believes America’s $375 billion trade deficit with China could be fixed by limiting its imports. However, Trump fails to include America’s exports of services, $223 billion, in his trade account. If we take goods and services into consideration, America’s trade deficit to China is only $152 billion. This number still exceeds the reality when the goods assembled within China–such as iPhones and General Motors automobile parts–with a majority of the profits going back to America, are not included in its exports to China. Despite the fact that the sixty billion dollar tariffs added up to only 0.25 percent of China’s GDP in 2017, China is not unresponsive. On March 22, Ministry of Commerce in Beijing publicly claimed that “[China] firmly opposes the unilateralism and trade protectionism of the United States. China will absolutely not sit back and watch as its legal rights and interests get hurt.” Following the proclamation, Beijing quickly adopted retaliatory tariffs, which amount to three billion dollars of US imports, including a fifteen percent duty on fruits, wine, nuts and steel pipes, and another twenty-five percent tax on eight other items, like recycled aluminum and pork. Within twenty-four hours, Trump escalated his proposal to include a twenty-five percent tax on Chinese imports in aerospace, machinery and medical industries. The strenuous tit-for-tat trade skirmish intensified when the Chinese government and Trump announced yet another round of tariffs, adding up to one hundred fifty billion dollars’ worth of Chinese imports. On April 4, the Chinese government sought to attack Trump’s supporters in particular by targeting the Midwest, whose economy depends heavily on agriculture. The elevated price in raw metals as part of the farm implements and the decreased competitiveness in soybean price will gravely strike states such as Iowa, Ohio, Nebraska, and Michigan. In response, on April 5, in the last round of vengeful tariffs up to now, Trump called for targeting another one hundred billion dollars of Chinese goods, with items ranging from artillery weapons to batteries.

While Trump’s tariff proposal is currently under review and, if passed, will not be initiated until mid-May, the unclear future is already rattling the US stock markets. As a direct reaction, Dow closed down 572 points, a drop of 2.3 percent, on April 6. With the midterm elections approaching in November, the GOP tries to maintain its lead in the Congress through tax cuts, potentially adding to 1.9 trillion dollars to the national debt between 2018 and 2028. Yet Trump’s unanticipated movement on trade clouds the situation. While Charlie Cook, editor of the non-partisan Cook Political Report, argues that Trump’s supporters are driven by long-standing “racial, religious, urban-suburban, social and cultural issues” instead of “economic self-interest,” most analysts believe Trump’s harsh tariffs will hurt Republican candidates and unsettle the President’s base. Trump’s trade policy also does not appeal to the Rust Belt states. Impact Social did an online research poll focusing on people’s reactions in the state of Pennsylvania. It found that a third actively disliked the plan, and only thirteen percent are in favor of it. Their fury comes from a much more complicated cross-border system where raw materials industries produce much less profit than the industries that require these inputs to manufacture items such as cars, beer cans, and chicken coops . As Bernard Baumohl, chief economist of Economic Outlook says, “More workers in the  US make products that are made from steel, than make steel itself.” As Horizon Investments reports, “There goes Iowa.” Trump’s extreme protectionist trade policy may have the effect of alienating moderate Republican voters.

Yet, even though the stock market’s volatility clearly reflects the economic implications brought by the new tariffs, most people do not anticipate further escalation of this fight for national dignity and economic superiority. They argue that ultimately this so-called “trade war” may just be more of Trump’s trademark posturing and lacking in any real force. China, as a developing export-oriented country, depends on the US as its second-largest trading partner. The US also depends on China as a market for its over-produced soybeans, which fit into China’s goal to improve the nutritional quality of its citizens’ diet. Moreover, this trade dispute is only a small part of a long US history of protectionist tariffs. The Tariff of 1798, for example, was implemented by James Madison. It was meant to protect northern industry against British competitors, but damaged the primarily agricultural economies of the south. The two highest tariffs were the 1828 “Tariff of Abominations” and the 1930 Smoot-Hawley Tariff. Since then, the US has swung between free trade and protectionism.

As events continue to unfold, it is too early to determine the exact scope of this so-called trade war’s impact. Yet tensions in business relations between the US and China are not new. In the past, a significant part of these tensions have unfolded in the technology sector. Trump’s Presidential Order which prohibited Broadcom (a Singapore-based tech company with close ties to China) from acquiring Qualcomm (its American rival) was issued on March 12. This act reveals the White House’s enduring concern for China’s supposed theft of American intellectual property. On March 26, Washington filed a WTO complaint accusing Beijing of violating its trade pledges by imposing unfair contract terms and allowing companies to use foreign-owned technology after licensing periods expire. While China has established IP legal framework consisting of the patent, trademark and copyright laws, its actual implementation does not fulfill American expectations. Different levels of emphasis on creativity in the educational systems and of technological foundations between the two countries contribute to their different degrees of strictness in IP regulations.

However, Beijing’s posture gives us hope that this trade friction will not escalate into a full-scale trade war. The Boao Forum for Asia (BFA), a non-profit organization hosting Asian and countries based in Hainan Province, was held from April 8 to April 10. In his opening address, Chinese President Xi Jinping celebrated the fortieth anniversary of Deng Xiaoping’s “open-door policy” which has fundamentally transformed China’s landscape from 1978 to 2018. He put forward four measures that China will adopt to increase its opening: widen market entries, create healthy investment, strengthen protection for intellectual property, and actively increase exports. He emphasized that “China does not seek a trade surplus,” emphasizing a point made during the Regular Press Conference of Ministry of Commerce Chinese government’s on November 9, 2017. Despite the conflicting signals being broadcast by China’s aforementioned fifty billion dollar tax targeting American soybeans, planes, and cars, Xi’s comments cheered the stock market on Tuesday when the Dow rallied by 429 points. Trump also praised Beijing’s promise to create a more accessible market and tweeted, “Very thankful for President Xi of China’s kind words on tariffs and automobile barriers … also, his enlightenment on intellectual property and technology transfers.” Many economists, including Robin Xing, chief China economist at Morgan Stanley, believe that this act marks the first step for the two countries to go back to the negotiation table and solve the dispute peacefully. It also shows China, a seventeen-year member in the WTO, is determined to shortcut its tariff barriers.

With this indication from the Chinese government that it is willing to reopen negotiations, Trump and the Congress should in turn closely inspect the potential consequences of a full-blown trade war–especially its ripple effects on surrounding countries, including Canada, Mexico, South Korea, Japan and the EU. The trade talks initiated this January between the US and South Korea highlighted a breach in Trans-Pacific Partnership (TPP) when the US sought to withdraw from regional alliances. The US hoped to open a South Korean market for American automobiles, a trade imbalance that is not addressed by the United States-Korea Free Trade Agreement (KORUS). South Korea is not only a direct target for American protectionism, but might also become the collateral victim of a trade war between the U.S. and China. According to  according to Korean Institute for International Trade, South Korea’s exports will decline by 6.4 percent if a trade war between the US and China escalates. In early March, anticipating Trump’s tariffs on European exports, Brussels proposed a list of items from steel to T-shirts that they would tax in response, opening up tensions between the two leading economic blocs. Furthermore, the US has the second largest trade deficit with Japan, amounting to sixty-nine billion dollars in 2017. According to Nikkei Asian Review, Trump’s resurrection of the 1930s trade policy would pose more challenges for Japan, according to Haruhiko Kuroda, the governor of Bank of Japan (BOJ), when Japan’s economy depends on yen’s inflation. A brewing trade war might “send the dollar sharply lower” and mire Japan’s hope for a stable economy. Japanese Prime Minister Shinzō Abe hopes that the US rejoin the TPP and uphold the multilateral international trade system with WTO at its center. In North America, the situation also looks blurry when US Trade Representative Robert Lighthizer hit an impasse in his renegotiation with Canada and Mexico concerning the eighteen billion dollar trade deficits with Canada and seventy-one billion dollar deficits with Mexico. Mindful of bilateral deficits, Trump could either exit NAFTA, or replace imports from Canada and Mexico with those from South Korea, China, or Japan. Yet because of America’s deficient manufacturing capacity, neither of these strategies will work when the US still relies on imports to supplement its petroleum products, motor vehicle parts and fruit and vegetable supplies.

Behind all these events is that China’s rising begins to threaten America’s dominant place in the world. China, as the world’s largest developing country with the second largest economy, has proved that its socialist system of laws with Chinese characteristics perfectly accommodates its need for development. China’s annual GDP growth rate, which has gradually decreased in recent years, reached 6.7 percent in 2016 and exceeded America’s by 4.8 percent. To sustain its growth, China needs the current multilateral trade system at work for its huge manufacturing industry. In response to two US-centric trading arrangements, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade Investment Partnership (TTIP),  China forged its own agreement: The Belt and Road Initiative (BRI) in Eurasia. Helping the regional countries build their infrastructure, China has gained more speaking power and political leverage. Yet this measure further defies the capitalist economic system when Chinese government subsidizes national corporations and enacts favorable policies for them. Behind the “trade war,” according to an unknown reporter with close ties to Beijing, is the two countries’ different “values.” How much the government should influence the market has always been their contending point, and this trade dispute is only an inevitable outbreak of the ongoing tension. Yongnian Zheng, Professor and Director of the East Asian Institute of National University of Singapore, believes that China’s confidence comes from its tight relationships with other countries. “Future competitions,” he says, “from the world economy perspective, one is the competition of technology, the other is the competition of system.” Behind the “trade war” is the battle of two different political systems. The war of ideology may not have terminated with the dissolution of the USSR. China’s rapid development in the high-tech sector and the apparent success of its unique economy system may have proved that the pending trade war is just the prelude to a long-term rivalry between the US and China.